Washington – As LandAmerica Financial Group lurched toward bankruptcy in late 2008, its leaders looked to the one place they thought could help: Washington.
Congress had just passed the controversial $700 billion bank bailout bill. The country’s biggest banks either had failed or were in danger of doing so.
LandAmerica, thinking it had no alternative, turned to the man who effectively controlled that $700 billion: then-Treasury Secretary Henry Paulson.
“LandAmerica needs immediate federal assistance,” Chairman Theodore L. Chandler Jr. wrote. Without it, “hundreds of innocent businesses and individuals will be needlessly harmed.”
While LandAmerica wasn’t tiny — it had revenue of $3.7 billion in 2007 — it was no behemoth, either. In the rush for bailout cash, it didn’t stand a chance.
The collapse of LandAmerica and its related entities rippled through the lives of hundreds of families around the country, whose cash — a total of $265 million – had largely disappeared.
Much of their ire is focused on the government: Their money ended up at LandAmerica only because the Internal Revenue Service said they must use a qualified firm to avoid capital gains taxes on real estate profits. Their money ended up at risk because oversight was so scant that companies were allowed to play with what should have been safe deposits. But when things started to collapse, the government didn’t lend a hand.
“Why did these people have to put their money with somebody they didn’t know? Why couldn’t they hold their own money?” asked Jerry McHale, a Florida-based certified public accountant who’s the court-appointed liquidating trustee of the creditors’ interests in the LandAmerica exchange services bankruptcy case.
After a complicated bankruptcy case last year, most of the claimants so far have gotten just 24 cents on the dollar back on the money they entrusted to LandAmerica (certain claimants got 70 cents); they can only hope that more money will come after a mass of litigation winds down.
The fact that the government forced them to use a company such as LandAmerica and then left them high and dry is what most galls Tracy Ralphs.
Last month, Ralphs went to visit the place he once planned to call home.
It’s in a partially completed subdivision called Cobblestone Ridge, in an Illinois town across the Mississippi River from St. Louis. “This was nothing but a cornfield,” he said, looking over the frostbitten ground punctuated by overturned dirt where houses were being built. He pulled in front of a fire hydrant and a utility box surrounded by barren ground. “This was supposed to be my lot,” he said.
Ralphs is 48, a retired Army lieutenant colonel who’s now working for the Army as a civilian in transportation engineering.
The government had moved his job to Illinois; his wife and two of three children are still living in Virginia. His home-building plan came to a sudden halt a little more than a year ago.
He’d entered into a 1031 exchange agreement with LandAmerica. By selling a property in Virginia and buying a new one in Illinois, he could avoid capital gains taxes on the Virginia sale by using a “qualified intermediary,” and LandAmerica was one of the best known. The contract said that LandAmerica “unconditionally guarantees the return” of his money.
His transactions initially went smoothly. More than $81,000 was wired to LandAmerica after the first sale. Within weeks, Ralphs was ready to close on his new property.
That was to happen Monday morning, Nov. 24, 2008. He’d called LandAmerica the previous week to set up the final transaction. He showed up early for his 11:30 a.m. closing.
At 11:18, a clerk for the law firm that was conducting the closing walked up and handed him a piece of paper. “I don’t know how to tell you this, but you don’t have any money,” she told him.
“LandAmerica 1031 Exchange Services Inc. is no longer conducting business effective immediately,” the e-mail from a LandAmerica official said.
“I was stupefied,” Ralphs said. “For three days, I felt like I had been hit in the head.
“I had taken my savings from a lifetime of working in the military and invested it. I made a profit. I followed the laws that Congress made.”
“So you’re telling me the intent of Congress was to give my money to them so they could make a profit by risking my life’s savings?” he said.
For the privilege of losing his money, Ralphs had paid LandAmerica an $850 exchange fee.
Afterward, he couldn’t afford to close on the replacement property, nor build his house. His daughter, a senior in high school, will have to adjust her college plans.
“I feel like I’m starting all over again, because basically I am,” he said.
Losing More Than Money
Like Ralphs, Rosanna Passantino of New Jersey was comforted by the unconditional guarantee on her contract with LandAmerica. But she still wasn’t satisfied.
After she deposited $351,000 with LandAmerica in September 2008 — just as the financial markets began their historic collapse — Passantino tried to monitor her money.
“Don’t worry, your money is safe,” she said LandAmerica employees told her. Her attorney’s office told her that the IRS and the Securities and Exchange Commission were there to make sure that her funds were safe.
When it had an opportunity to help, however, the SEC looked the other way.
At issue were something called “auction rate securities.” They’re a type of bond that has a constantly changing interest rate, and they’d long been peddled as safe. LandAmerica bought them from Citigroup Inc. and SunTrust Banks Inc., two of the nation’s largest banks.
The SEC had been aware of problems in the auction-rate market, although it wasn’t able to prevent the abuses.
In 2006, for example, the SEC cited Citigroup and several other firms for improperly running the auctions to sell the securities. It gave the firms modest fines and said the settlement was an “appropriate” effort to deter future violations of securities laws.
Two years later, however, Citigroup and other companies were in trouble again, this time for improper sales and marketing of auction rate securities. The SEC took enforcement actions against the firms, forcing them to reimburse billions of dollars to their customers.
After the market for auction rate securities collapsed, the SEC said it was on top of the situation.
“Tens of thousands of investors are having billions of dollars of liquidity restored to them in very short order,” SEC enforcement official Linda Chatman Thomsen told Congress in September 2008. “This relief is virtually unprecedented in type, magnitude and timing.”
Not for some auction rate customers.
While Thomsen boasted that the SEC “immediately responded to the market failure” and that “retail customers, small businesses and charitable organizations will have the opportunity to receive 100 cents on the dollar on their investments,” LandAmerica’s customers didn’t get anything.
The SEC’s rationale: While these individual customers put their money into LandAmerica, it was LandAmerica that went to big banks such as Citigroup to buy the securities, and the SEC treated large institutional investors differently, since they presumably were sophisticated enough to understand the risks.
LandAmerica even contacted the SEC directly, to no avail. With its letter to then-Treasury Secretary Paulson, the company made one final stab at federal assistance.
“Nothing became of it,” said Rachel Strickland, a New York attorney who helped orchestrate LandAmerica’s bankruptcy filings. “There were very few efforts that were not attempted.”
For Passantino, LandAmerica’s bankruptcy was devastating. Her plans to build a new home and restart a child-care business were killed. Her family is frazzled and fractured; her stress is the cause of dangerously high blood pressure, anxiety attacks and shooting pain in her right temple.
She lives in a beautiful home outside Trenton, but is barely scraping by: Since early last year, she’s been on food stamps — $212 per month — and a state energy-assistance program that chips in another $94 a month. In February, with big snows still covering her neighborhood, Passantino kept her thermostat at 45 degrees to save money.
“We have lost much more than just funds,” she said. “We have lost our mind, pride, dignity and even our will to hope or live.”
By December, she’d received the $84,000 check for her share of the bankruptcy proceedings. In February, it still sat, uncashed, on her desk. If she cashed it, she feared that she’d no longer qualify for the assistance programs that had gotten her through the previous months.
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